Does crowdfunding need tighter regulation?

The collapse of Rebus could cost investors £800,000. A small price to pay for a financial revolution?

‘I bought £1,000 worth of shares while I was drunk,’ an armchair investor admitted to MT last year. Such is the risk of making small business equity something that can be bought online at the touch of a button.

Crowdfunding has taken off in a big way over the last few years as entrepreneurs tired with the stringent intervention of venture capitalists overbearing ‘dragons’ have turned to members of the public in search of growth funding. While Britain’s cash-starved small firms have welcomed a new source of cash, some have raised concerns about the prospect of Joe Public pouring all their savings into risky investment propositions. The recent collapse of claims management firm Rebus, which raised more than £800,000 through crowdfunding platform Crowdcube last year, has reignited those fears.

It used to be illegal to market such shares to anybody who wasn’t self-certified as a ‘sophisticated’ investor’ with the savvy to value a small company and the knowledge that their cash would be hard to take out and could easily disappear for good. But in 2014 the Financial Conduct Authority relaxed the rules to make it easier for the man on the street to participate. Such investors must agree to invest less than 10% of their portfolio in small companies, but whether they are all doing so is unclear and seems unlikely.

‘Whilst the failure of any business is disappointing, not all businesses will succeed and [it] therefore highlights the importance of spreading investment risk with a diversified portfolio,’ a Crowdcube spokesperson told the FT, in response to Rebus’s collapse. It’s a perfectly good point but it won’t wash with those who feel the industry needs a greater level of transparency and oversight.

The launch of av last year could be a positive development, though it remains to be seen how effective this will be. Other proposals like that from the Alternative Business Funding platform for crowdfunders to publish their failure rate seem reasonable. Showing investors exactly how risky something is will likely give them a greater pause for thought than the boilerplate slogan, ‘your capital is at risk.’

But ultimately we need to accept that loss is as much a part of the game as success. Professional investors learn to spread their risk and have to tolerate a certain amount of failure; the public needs to do the same. Whether the existing information available to them is sufficient to make such decisions is a point of contention.

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